SAN FRANCISCO (06/27/2000) - While technically still afloat, the proposed merger between Sprint Corp. and WorldCom Inc. is effectively dead in the water, and Sprint will likely be snapped up quickly by another suitor, industry analysts said Tuesday.
The U.S. Department of Justice (DOJ) announced Tuesday morning that it will go to court to block the proposed US$129 billion merger, arguing that a marriage of the second and third largest U.S. long-distance phone companies would harm competition and lead to higher prices for consumers and businesses.
Responding to the DOJ's move, Sprint was the more vocal of the two telecom companies. In a lengthy statement this morning, the carrier disagreed with the DOJ's contention, arguing that the companies have presented "an overwhelming case in support of the merger."
A spokesman for Sprint Tuesday afternoon said the company will review its options in the next several days, and hopes that "ultimately a merger can be reached."
WorldCom was more laconic. In a terse statement this morning, officials said the company will "promptly review its options with Sprint." A WorldCom spokesman this afternoon refused to expand on the statement, declining even to say whether WorldCom is still interested in the deal.
"It sounds like WorldCom is picking up their bat and ball and going home," commented Jeff Kagan, an independent telecommunications industry analyst in Atlanta, Georgia.
In a separate statement Tuesday, WorldCom said that in light of the DOJ's action, it had withdrawn its plan for review by the European Commission. The EU had been conducting its own investigation of the proposed merger, and just this morning had indicated that it may also seek to block it.
Technically, putting the merger on hold in Europe doesn't preclude a union between the carriers. If WorldCom and Sprint can come up with a merger plan that is acceptable to U.S. regulators, they could return to Europe later on and present a new proposal there. But the chances of reaching an agreement that will satisfy the DOJ, not to mention the shareholders of WorldCom and Sprint, is slim, analysts said.
"The (U.S.) government wants Sprint and WorldCom to be competitive, and it isn't interested in carving up Sprint because that would weaken it as a competitor," said Scott Cleland, an analyst with The Precursor Group, an independent research company in Washington, D.C.
The deal is "effectively dead," Cleland added.
WorldCom has said it's interested primarily in Sprint's PCS wireless business, and has offered to divest other portions of the company, including Sprint's Internet backbone and long-distance interests, in order to satisfy regulators that the merger won't harm competition, according to published reports.
However, according to Sprint's statement issued today, the DOJ had been looking for Sprint to spin off its local telephone operations as well as its long-distance business for the deal to go ahead -- something Sprint was apparently not prepared to do.
If the companies can't come up with a plan that's amenable to regulators, their only other option besides walking away from the deal is to battle the DOJ in court. That could be a lengthy process, and is a route WorldCom is unlikely to take, Cleland said.
"That's a nonstarter -- the government has a very powerful case in court," he said.
Other analysts said Sprint has probably been weakened as a company while it waited for approval of the merger. Uncertainty about the company's future has likely caused some potential customers to look elsewhere for service, said Richard Kuehn, president of RAK Associates in Cleveland, Ohio.
"I think waiting around for the merger has had to have weakened the company, and they will have be bought," Kuehn said.
Other analysts agreed, including Steve Koppman, a senior analyst with Dataquest Inc. in Oakland, California. Likely suitors for Sprint include Deutsche Telekom AG and BellSouth Corp., both of which have expressed an interest in buying the carrier, Koppman said. "I think one of them will still be interested," he said.
As for WorldCom, Koppman said, "they'll want to make a wireless acquisition in a hurry because they're also demoralized. They'll want to take the attention off (the attempted Sprint merger) and get back to making progress."
WorldCom's shares on the Nasdaq stock market closed at $36.69, up $2.19 from yesterday's close. Sprint's shares ended the day at $58.38, down $1.19.
WorldCom, in Jackson, Mississippi, can be reached at +1-601-360-8600 or http://www.wcom.com/. Sprint, in Westwood, Kansas, can be reached at +1-913-624-3000 or http://www.sprint.com/.